Retooling For The Future

Gregory KarpOf The Morning Call

Over long periods, business is a Darwinian contest in which the fittest survive. Fitness in this case means the ability to adapt to changing surroundings. And in 2009, the surroundings for Lehigh Valley businesses is a deepening economic recession.

Businesses that survive will be ones willing and able to change. The nimble will succeed; the passive will perish.

In Outlook 2009, we'll look at how Lehigh Valley businesses and organizations are retooling for the future -- how companies are reinventing themselves as they try to adapt to the breakneck pace of change.

No one is exempt -- from retailers and car dealers to manufacturers and service firms; from government and nonprofits to the media and logistics companies. An economic decline spreads from sector to sector like the most virulent contagion.

"Everything has changed, and changed significantly," said Kamran Afshar, whose Bethlehem firm Kamran Afshar Associates Inc. conducts market research for local companies. "Your experience from the boom times will not help you. It will actually mislead you. This concept of business-as-usual will not work."It's the economy, stupid

A survey of 478 local businesses during the final three months of 2008 found the No. 1 issue on the minds of owners was, not surprisingly, the economy, according to the Pennsylvania Business Retention and Expansion Program Summary Report.

The economic climate -- in the region, in the country and around the world -- is a daunting one for turning profits. It promises to get worse before it gets better. The housing crisis led to a financial crisis, which led to a credit crisis, which led to all-out recession.

The U.S. government and governments around the globe are scrambling to inject untold trillions of dollars into their economies in desperate hope of resuscitating a comatose prosperity.

U.S. companies that began making strategic job cuts with a scalpel are today using a machete. Nationwide, companies cut nearly 600,000 jobs in January alone, the most since 1974. The nation's unemployment rate catapulted to 7.6 percent. All told, the economy lost a staggering 3.6 million jobs since the recession began in December 2007.

Reports of sales and profit declines are more frequent than at any time in the past 35 years, says the National Federation of Independent Business. Firms have little choice but to reduce costs to survive. And for small firms, the major cost -- about 80 percent -- is labor.

In the Lehigh Valley, 2008 marked one of the worst years in decades for the local job market. The year-end unemployment rate spiked to 7.1 percent, the highest since 1993. Nearly 30,000 people in the region were out of work in December. That's the most since at least 1990, the earliest that comparable data was kept. In 2008, the region's employers cut 4,700 jobs. Again, that's the most in at least 18 years.

Hunkering down

How are Lehigh Valley companies coping? Fundamentally, they're paying attention to the only two things that matter to a bottom line -- income and outgo, sales and expenses. Some are shrinking, while others are expanding. Still others seem to be hunkering down, just trying to weather the storm.

For most companies, surviving that storm means scrutinizing expenses.

Bob Wendt has visited a great many of those companies as regional coordinator for the Business Retention and Expansion Program operated through the Lehigh Valley Economic Development Corp. Officials from that program visit some 800 local companies per year.

"I go into a company's 15-person service firm," Wendt said. "I'm talking to the owner, and we're in a room with a white board. It says, 'Plan for '09 -- SPEND NO MONEY.' "

"There's just a general funk."

Of course, cutting expenses often means cutting personnel as businesses consolidate operations. In other instances, it means not hiring -- trying to do more with fewer people. The easy part is cutting fat left over from the flush times or delaying capital projects conceived during better days. After that comes tough decisions about cutting flesh and bone.

The credit crunch has forced companies to make choices about how they use their cash. Some businesses are boosting cash flow by reducing inventory, while others are squeezing suppliers for better prices and delaying payments to those suppliers. "Every piece of the logistics chain is living off its inventories and shortening lead times," Wendt said.

Some companies are slashing prices, hoping to retain market share as customers become more price sensitive.

Finding opportunity

The fittest of companies are able not only to weather a recession but capitalize on it. Prices are down and availability up.

That might mean buying commercial real estate cheaper or even buying out competitors. For example, the Brown-Daub auto dealership group has capitalized on the sour economy and ailing car market to buy up smaller dealers locally.

Other opportunities lie in improving the pool of personnel, stacking payrolls with more qualified workers. "The one thing I've heard in some of my visits is ... 'I've been able to strengthen my bench with people who I never would have been able to touch before," Wendt said.

And firms that struggled to find qualified workers no longer are. "I was hearing as recently as a year-and-a-half ago, 'I can't find the skilled, technical help that I need,' " Wendt said. "I'm not hearing that at all anymore."

Tourism officials see opportunity in marketing the Lehigh Valley as an inexpensive getaway destination for cash-strapped travelers from nearby mega-regions.

Other businesses are finding it necessary to reinvent themselves.

Many local manufacturers are surviving by concentrating on narrow niches of business. Some service firms are taking a fresh look at customer service, attempting to make that a competitive advantage. Restaurants are revamping menus to cater to more frugal diners.